A Title Nightmare: Two Titles and Two Owners for One Yacht

For this installment of “Ask a Maritime Attorney,” we are departing somewhat from our usual format. We are asked from time to time to share legal “war stories,” so rather than answering a specific question, we will offer this discussion as a case study.

The Facts This case involved a retired husband and wife who sold their home, with a dream of buying a large sailing yacht and cruising the Pacific (we’ll call them Mr. and Mrs. Smith).

The Smiths ultimately made an offer on a $300,000 yacht in Florida, and they did a lot of research prior to closing the deal. They found a qualified marine surveyor to inspect the boat, and it passed the survey and sea trial with flying colors.

They researched California and Florida sales tax law and successfully completed the transaction with no tax liability. They retrieved an Abstract of Title from the Coast Guard and confirmed that there were no recorded liens, and that the seller was the sole owner. So, they paid their $300,000 and eventually transported the boat to California.

Upon arriving in California, they started to prepare the boat for their voyage – but their dreams of cruising the Pacific were changed dramatically when they started to experience health problems. They decided to offer the boat for sale, but they received a disturbing communication from the Coast Guard. It seems that a lawsuit concerning their boat was under way in South Carolina, and that someone else was claiming ownership of the boat.

The South Carolina lawsuit involved a lender who was attempting to enforce a mortgage against a boat owner (we’ll call him Mr. Jones) who had lost his boat in a tax auction for failing to pay his local property tax in South Carolina. The Smiths initially believed that the lawsuit involved a different boat. The suit made reference to a different boat name, and – more important – the boat in the lawsuit had a different Coast Guard Official Number.

Further, the Smiths’ Coast Guard Abstract of Title made no reference to a South Carolina tax sale, to the mortgage or to Mr. Jones. There was, however, an item that should have led to further inquiry. The first entry on the Smiths’ Abstract of Title was a transfer from a South Carolina title into Coast Guard documentation. This indicated that the boat was not originally documented with the Coast Guard, and that the title history reported on the Smiths’ Abstract of Title was incomplete.

Upon investigation, a complicated and distressing story surfaced. Jones had, in fact, lost the boat in the tax auction, six years prior to the purchase by the Smiths. The boat had been purchased at a fraction of its value through a tax auction – by someone we will call Mr. Johnson. Johnson was issued a South Carolina title and a Coast Guard Bill of Sale at the time of the auction, but he was unable to transfer Coast Guard title into his name because the mortgage lien was still valid and unsatisfied.

Johnson was not interested in paying off the mortgage, but he nonetheless wanted to remove it from the title and was prepared to take whatever steps were necessary. His prayers were answered when he found that the hull identification number that was physically stamped onto the yacht differed from the number on his title paperwork, and on the original title held by Jones, by one digit. We later discovered that this had been due to a clerical mistake made by the builder at the time they issued the original builder’s certificate.

Armed with this information, Johnson applied for and was granted a new South Carolina title under the new hull number. He then applied for a new Coast Guard Certificate of Documen-tation, with the new South Carolina title as the sole proof of ownership.

He actually perjured himself when he filled out the Coast Guard application materials, by stating that the vessel had never been documented with the Coast Guard. His application was approved, and he was issued a Certificate of Documentation under a new Official Number. Under the new number, the title was free and clear of any liens or mortgages, and the Coast Guard had no idea that it was connected in any way to the boat’s other number. A new chain of title was born.

The lenders, meanwhile, took steps to enforce their mortgage against the new title through the South Carolina courts. They established first that the two titles actually belonged to one boat, and then, that certain technical problems with the tax sale were sufficient to void the sale. This meant that Johnson never purchased the boat, and therefore had no right to sell the boat to the Smiths.

Mr. and Mrs. Smith, therefore, had paid $300,000 to someone who never owned the boat, and their title was found to be void. They filed a lawsuit against Johnson to hold him responsible for his fraud, but he had lost or hidden all of his assets and the Smiths were not able to recover from him.

A hard-working and honest retired couple had carefully researched the purchase of their dream yacht, but they lost everything.

Lessons Learned In hindsight, the buyer could have taken steps to avoid these problems, starting with a more diligent review of the Coast Guard Abstract of Title.

A boat that was documented when it was sold to the first owner, with an unambiguous and uninterrupted chain to the current owner, is less likely to have a problem than a boat that was state-registered for part of its life.

State registration is, of course, common, especially for older yachts – and the vast majority of transfers from a state title into Coast Guard documentation are perfectly legitimate. It nonetheless adds a huge element of risk, because a state title does not generally allow for an adequate search of the title history.

Physical inspection of the boat is also important. Compare the Hull Identification Number stamped on the boat’s transom to the number recorded in the Coast Guard records. And compare the Coast Guard Official Number marked on the boat to the number on the Certificate of Documentation. Federal law requires the Official Number to be permanently affixed to the vessel, so that alteration, removal or replacement would be obvious.

A questionable title history should also lead a buyer to consider purchasing title insurance for the boat. This product, which is so common in real estate transactions, was not available for vessels until very recently. At this time, the policy is only available from First American Title.

Anomalies and unanswered questions surrounding a vessel’s title history may be perfectly innocent, but they nonetheless inject a significant level of risk into the purchase process. As always, we encourage the parties to a vessel purchase transaction to consult with an experienced maritime attorney.